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Active ETFs Have Arrived. Are They Here To Stay?

By Matt Salm, Investment Analyst

One of the biggest trends in investing has been the growth of Exchange-Traded Funds (ETFs) in the last decade: the industry quadrupled in size from 2010 to 2019. For investors who want inexpensive, tax-efficient exposure to diverse market segments around the world, ETFs are tough to beat.

That said, ETF product offerings aren’t perfect. Because ETFs disclose their portfolio holdings daily, active managers have largely avoided the space, leaving a dearth of options for investors who want alpha-seeking, actively managed exposure. But this year, that’s changing.

In April, American Century Investments launched the first semi-transparent actively managed ETFs. Legg Mason and Fidelity quickly followed suit. Rather than disclose their holdings in real-time, these issuers have received SEC approval to disclose their full portfolio holdings quarterly, similar to how mutual funds operate. This semi-transparent structure has garnered interest from asset managers that have previously avoided the ETF space. For example, T Rowe Price is set to rollout its first four ETFs – all of which will be actively managed. These funds will be run by the same management teams that run T Rowe Price’s highly regarded mutual funds. But because ETFs have lower operating costs, they’ll be slightly cheaper for investors to hold.

At the same time, some asset managers have embraced fully transparent actively managed ETFs. JP Morgan launched two new actively managed equity ETFs in May, both of which will disclose their portfolio holdings daily.

It remains to be seen whether semi-transparent or fully transparent active equity ETFs will dominate, but either way many industry analysts expect the trend toward actively managed products to persist. Todd Rosenbluth, Senior Director of ETF and Mutual Fund Research at CFRA, says demand for these actively managed products has been very strong. Many investors “want to outperform the broader market [and] want the benefits of tax efficiency and the low-cost structure [of] ETFs,” he says.

I’m not entirely convinced. Of course everyone wants to outperform the market… But when active funds inevitably stumble, will investors continue to pay higher fees for active management, or will they jump ship?

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